Michaels finally set to go public, but Bain, Blackstone selling stake off slowly

It’s been a long slog for arts and crafts retailer Michaels to get to the public markets.

After the recession killed the IPO market’s appetite for retailers for several years, a stroke sidelined a former CEO John Menzer in 2012, soon after Michaels first filed to go public. After a devastating data breach in December, the company finally set the terms on Monday of its long-awaited IPO.

The deal values Michaels at $3.8 billion, and shares are expected to start trading on Nasdaq on June 27. (It expects to sell 27.78 million shares for between $17 and $19 a pop, according to its latest IPO prospectus.)

Michaels was one of the few major specialty retailers that managed to see revenue growth during the recession, and its hot streak has continued, with comparable sales rising 3.8% last quarter, while most stores struggled. It is also a cash machine: the retailer generated $2 billion in cash from operations between 2009 and 2013.

Yet its owners, Bain Capital and Blackstone BX, which led a group that took Michaels’ private in 2006 and each hold about 46.5% of shares, pre-IPO, seem poised to take their time selling off their holdings, even though eight years is an eternity for a buyout firm to hang on to an investment. A third major investor, Highfields Capital Management, owns another 6.2%.

The three will still collectively own 85.5% of shares after the IPO (83.4% if underwriters, led by J.P. Morgan JPM and Goldman Sachs GS exercise their option to buy shares from the selling stockholders).

The relatively slow selloff is likely because of concerns Michaels’ debt load and slowing growth potential could curb demand for shares.

By the company’s own admission, it is debt-laden ($3.7 billion in debt). The IPO is aimed at partially remedying that issue. Michaels will use the estimated $466 million in proceeds from the IPO to pay off notes it issued last year to finance a dividend for its owners.

Michaels’ finances are not the offering’s only red flag. The retailer is only getting started in e-commerce, it still dealing with the fallout of the data breach, which involved 2.6 million customers and resulted in 5 class-action suits against Michaels, and is getting close to saturation—in its prospectus, Michaels said it believed there was room for 1,500 stores- it already has 1,150 or so namesake stores.

What’s more, the $18 midpoint range for the IPO would give Michaels an price to earnings-per-share ratio of 19.9, which is rich compared to other speciality retailers, Francis Gaskins, an IPO expert and director of research at Equities.com, told Fortune.

Given how many IPO’s have flopped this year, either because of aggressive pricing or a company floating too many shares to start, it is logical for Bain and Blackstone to go slowly to avoid a flop on June 27, especially if they want to sell off more of their Michaels shares later this year in secondary offerings.

“They want to make sure they can do a secondary offering down the road. The IPO is just a toe in the water,” said Gaskins.

Big banks are riskier than ever, says FDIC vice chair

FORTUNE — It has been six years since excessive risk taking at the largest banks catapulted the globe into one of the biggest recessions in modern history. And in many ways, the U.S. has not fully incorporated the lessons of that economic crisis.

I spoke with Tom Hoenig, vice chair of the FDIC and former president of the Federal Reserve Bank of Kansas City, Mo., on May 14 about the ongoing dangers within the financial system and what regulators and others should be doing to turn the tide. Below is an edited transcript of our conversation.

Eleanor Bloxham: We met four years ago when we both spoke at a banking conference in Charleston. Things were rocky then, and it is clear that today the biggest U.S. banks are still very risky. Which of the risky behaviors at the biggest banks today scares you most?

Tom Hoenig: Here’s how I would describe it. These institutions at the time of the crisis were highly leveraged. They were engaged in derivatives transactions and selling collateralized debt obligations CDO. The crisis occurred, and they required government assistance.

Today, people argue these large banks are better capitalized — and they are — but they are still highly leveraged, and there’s still a tremendous amount of derivatives activity. The notional value of derivatives is higher today than at the time of the crisis. Some changes have occurred, but banks have been resistant to reform in the area of collateralized loan obligations (CLOs) and been heavily involved in leveraged lending, which is risky.

If we were to have a decline in the economy, taxpayers could still be exposed to the need for government intervention. It’s a concern I have and the public should have as well.

What has the FDIC done, so far, to ameliorate the risks for depositors and the economy?

But it’s not enough. I’m most concerned in Dodd-Frank with the Title 1 and Title 2 provisions. Title 1 primarily means banks would be resolvable under chapter 11 bankruptcy. We still have a lot of work to do to make that happen. Title 2 relies on the government as a backstop. It’s a form of bailout. We need to move away from government intervention that creates moral hazard. Being able to use Title 1 would be a huge factor in making the banking industry safer. [On May 7, Hoenig discussed the importance of the banks’ living wills in accomplishing this.]

Pay programs at the largest banks still encourage risk taking. The FDIC put out an advanced notice over four years ago asking for comments on proposing a rule that would charge banks more for depository insurance if their pay programs were risky. What are the FDIC’s plans to act on this proposal?

I don’t know the status on that. I don’t know of any immediate work on it.

I’d say this: If the banks knew they could have a true bankruptcy, their pay programs would become less of an issue. If I think I will be bailed out, I’m more likely to pay for volume increases without quality controls in place. It is very important to make the banks bankruptcy-compliant, and we’ve moved slowly on that.

In a speech in Boston in early May, you discussed the “too big to fail” subsidies that the largest financial firms receive from the government. Can you describe in plain English how these subsidies for banks work and how they help big banks get bigger and more systemically important?

I’ll try. If I lend you money and I know you’ll fail and lose money, I’ll be careful about lending to you and charge you more for being risky. But if I am convinced you won’t fail, that you’ll be bailed out, I’ll be willing to lend you money with a lower charge for risk. It lowers your cost of capital. Someone else who doesn’t have that advantage will pay more for capital.

Having this benefit allows the biggest banks to raise capital more easily and take on higher risk profiles. With a lower cost of capital, they can compete others out of business. Consider if you had airlines and some were subsidized on fuel. Those that were subsidized would run the others out of business.

A recent article in the Financial Times refers to an Oliver Wyman study that suggests the biggest banks don’t receive such subsidies. What are your thoughts on that?

I question it. As I understand it, it [the study] was sponsored by the [financial services] industry. On our website, we have numerous studies on “too big to fail” subsidies. These studies come from academics, from the IMF, and the OECD, and they systematically show big banks do receive subsidies. The findings stand in contrast to what you’ll find in the commissioned studies.

What more could the FDIC be doing to address the risks in big banks?

We are using risk-based pricing now for depository insurance. A broader issue — and this applies to the FDIC and other regulators — relates to bank examinations. When we examine a regional or a small bank, we do a full-scope exam. We look at the whole bank and make a judgment about the overall condition of the bank.

In contrast, the largest banks have embedded examiners that look at information that management provides to them. It’s not the same as a full-scope exam. We should be providing a more intense exam of the largest banks and look at their credit and investment portfolios using statistical techniques to get a deeper understanding of the bank’s risks. Then you can do a stress test that is more targeted.

Do you think lack of prosecutions by the Justice Department and the SEC have sent the wrong signals to bankers?

I’m not sure about your premise. There’s been a lot of activity there. I don’t have a judgment on that.

What more could legislators be doing to protect the U.S. and global economies from another great recession?

I do think there is more that could be done. My colleague and I wrote a paper on it. If you could … separate out commercial banks from those doing broker dealer, trading activities, I think that would add to safety and soundness.